Globalization has directly impacted various aspects of the Centralized Securities Depository (CSD) market sector. A drive for consistency and a more standardized approach in operations and systems has resulted. In addition, there is continuous pressure on participants and operators to improve efficiency in all elements of the transaction value chain.
CSDs are exposed to more complicated securities and resultant activities, e.g. Corporate Actions, because of the global perspective and market refinement. Processes and systems must now be much more adaptable. In such a dynamic environment “speed to market” of new products and services is critical. The CSD systems must facilitate this “speed”, which can be achieved by flexible, generic functionality for the different steps in settlement or other processes.
Transactions between market participants require matching and settlement. Trades can be captured directly from a trading (exchange) system or other external system, such as a CCP, matching service or back office STP system or manually entered by participants. Trade matching and confirmation prepare transactions for settlement according to applicable settlement rules. Assets and financing are verified, and securities may be locked-in in the investor CSD prior to settlement.
One important factor is the handling of liquidity/cash/credits. Normally, there is one or more payment systems present. A payment system could be a central bank of a country, one or more commercial banks of a country or some other entity (for instance the securities settlement system), or a combination.
The payment system interfaces the securities settlement system. There are basically three known models presently used. The first model is an interfaced model, or a real-time settlement model, where no cash is handled at all in the securities settlement system, instead a message is sent to the payment system each time a transfer of liquidity is necessary. The second model is a dedicated model, or a prefunding model, where cash is moved into the securities settlement system and is locked during the entire settlement period (normally a day). The third model is an integrated model, or liquidity transfer model, which is a combination of the first two models, i.e. cash is prefunded into the securities settlement system but not completely locked, thus enabling further transfers of liquidity between the payment system and the securities settlement system.